Turkish lira faces a rocky new year as inflation hits 19-year high and could go higher

Turkey's lira tumbled again overnight over rising inflation fears, with markets showing little faith in President Recep Tayyip Erdogan's promises that the worst of the country's economic turmoil is over.

Inflation in the country of 84 million hit a 19-year high of 36.1% for December, the highest in all of Erdogan's tenure as president. And economists warn it could still go up, thanks to Erdogan's unorthodox policy of cutting and refusing to raise interest rates, a standard tool used by monetary policymakers to cool down rising costs and strengthen local currencies.

The lira was trading at 13.44 to the dollar on Wednesday morning at 9:45 a.m. in Istanbul, already facing a rocky start to the new year after having lost about 45% of its value against the greenback since the start of 2021, which was its worst year in two decades.

Erdogan last month revealed a new rescue plan to bolster the currency without raising rates, which essentially entails protecting local depositors against market volatility by paying them the difference if the lira's decline against hard currencies surpass banks' interest rates. Critics say this plan is unsustainable, will further deplete Turkey's already low FX reserves, and is essentially one large hidden interest rate hike.

"We've seen time and time again, particularly in emerging markets — foreign investors sell the currency, local investors sell the currency when they think interest rate policy has gone a bit wacky," Christopher Payne, chief economist at Dubai-based Peninsula Real Estate Management, told CNBC on Tuesday. "The result of a collapsing currency is inflation. And there's really no way to escape that."

Food and beverage prices in Turkey are up 44% year-on-year, and consumer prices rose 13.58% in December alone, according to the Turkish Statistical Institute. Some economists predict inflation hitting as high as 50% by the end of the first quarter of 2022 if Turkey's monetary policy — seen as direly lacking independence and controlled by Erdogan — is not reversed. Goldman Sachs sees it going above 40% for most of the coming year.

Erdogan, meanwhile, said he was "saddened" by the dramatic spike in inflation.

But the president continues to brush aside concerns, saying on Tuesday from Ankara that the "excessive" price increases are "thorns" and "pebbles" on Turkey's path, and that his government will get rid of the inflation "bubble." Erdogan added that he is determined to put Turkey in the world's top 10 economies. The country's currency fared the worst out of all emerging market currencies in 2021.